Buying Crypto in 2019 or Earlier Was Before Adoption Validation, Buying Today Is at the Beginning of Mainstream Adoption
Having been closely following the blockchain space since I graduated college in 2013, it’s been my observation that in today’s market the crypto space is no longer doubted as a useful technology and legitimate asset class. After the bubble burst in 2013, there was widespread consensus that Bitcoin would never be useful ever again: not as a store of value, not for remittances, or as a medium of payment. The sentiment for Bitcoin in San Francisco in 2015 was bleak and hopeless while all the hype was around building mobile app startups. The survivors of the 2013 bubble were a niche group of enthusiasts and some contrarian VCs who saw the long-term potential. Similarly, after the following bubble burst in 2018, there were serious doubts whether the adoption thesis around Bitcoin and blockchain protocol applications would actually prove itself.
Pre-2019 was insanely early. The risk/reward ratio was insanely skewed at that time to be a lot riskier and a lot more asymmetric in potential to the upside than it is now. Pre-2019 was a time to think of Bitcoin and Ethereum as venture investments: buying a call option that would yield asymmetric returns if Bitcoin were to be adopted and Ethereum would mature to be a platform for dapps.
The main difference that we’re seeing with crypto markets after the March 2020 covid-driven market collapse is how Bitcoin and Ethereum are correlating to major market indexes such as the S&P500. This correlation to traditional markets is a tremendous milestone for crypto assets; it’s signaling that the world now accepts crypto as a legitimate asset class with fundamentals and longevity. I anticipate that as the correlation to major stock indexes rises, crypto will also fall in daily volatility levels as well as pullback percentages from all-time-highs as the years come. I think crypto will evolve just like how Google, Apple, Amazon did since their early days: sharp volatility and pullbacks until finally realizing a bulk of its valuation potential many years later.
While other bear markets in crypto have seen 80–90% retraces from ATHs, it seems unlikely to see such pullbacks again in crypto given how much the global consensus has grown positively around crypto assets in the past two years. As a rough ballpark estimate, if Bitcoin is 2–3x more volatile than normal equities, which can retrace 10–25% any given year, a 50–60% retrace on Bitcoin might make sense for an extremely attractive entry point for long-term investment.
Cultural Evolution of Crypto: People Are Buying Crypto Now For The Right Reasons
Every crypto cycle it seems we grow the population of long-term community believers who are buying and holding crypto for the long-term vision and right reasons. There was a time when Roger Ver and Erik Vorhees were the only evangelists growing the Bitcoin community. Then later came Andreas Antonopoulos, and later Michael Saylor. Every cycle we grow in a speculative mania where tons of people come for the easy up only trade, but after the bubble deflates, a large % of these people exposed to crypto will come back because there is fundamental value and a long-term narrative to Bitcoin and other crypto assets. This is how the network effect of crypto asset holders grows: like a lung, expanding, retracing, but constantly growing over a long period of time.
The Power Of Online Cults and Tribalism
Most people surfing the web have a dire need to feel part of a greater community and connected to others. Crypto assets are an insanely powerful tool for aligning people in cozy, tight knit communities where they can make them feel like they belong somewhere. Bitcoin was major validation of this. It wasn’t so much the technology as it was the communal network effect and cultism the arose around the narrative that drove much of its success. Now, 14 years later, one can enter the crypto space and they don’t have only one option of joining the Bitcoin community. Today, they can be part of the ETH community, another Layer 1 chain, the BAYC NFT community, and so on. The need for people to feel like they long somewhere on the web is an incredibly powerful, viral and sticky force that will be at the heart of the growth and creativity of crypto markets. As I blogged back in 2018, crypto is all about community.
It amazes me to see all the creativity in new assets being born in the crypto world everyday: new DeFi products, new stablecoins, new NFT projects and so on. A lot of traders and speculators in the crypto space label crypto trading as a game. The reason why I think people define crypto as a game is because participants will continue to trade and make bets because they will always feel like they have some form of asymmetric information or personal edge: maybe it’s a personal insight, early access to information, speed/timing, and so on. So long as participants continue to feel like they have some edge at trading crypto assets better than others, I’m confident we’ll continue to see endless creativity of new assets, and lots more rapid price acceleration in early projects, as well as fomo and bust cycles over and over again.
Why EVM Has a Developer Network Effect
One of the most exciting developments in the space is seeing the activity and innovation for EVM applications: DeFi, NFTs, DAOs, and metaverse. Many have made the argument that Ethereum’s network effect is not defensible, and my opinion here is that there are strengths for ETH mainnet that will never be replaceable, but there are new infrastructure markets that can be met by alternative scaling networks.
Ethereum has stood the test of time. Having been live since 2015 without any major double spend or outage issues, by its track record alone, it can be judged as the most secure and reliable smart contract chain in the space. Therefore, any mission critical DeFi or minting of new assets will always be prioritized by a majority to go on ETH mainnet. This is Ethereum’s network effect and moat: it’s uptime, security and consensus.
However, scaling is the opportunity where other networks can capture adoption. I don’t see this as competitive to ETH mainnet, but rather a positive sum opportunity where other networks with different pros and cons can cater to this emerging need for more throughput for new applications. This might include DeFi AMM and lending, new stablecoins, and NFT trading and minting. While it seems to be a competitive arena with all sorts of new networks competing for developers to deploy their projects on their networks, there is one clear conclusion I see here which is that building on EVM has captured a majority of the mindshare of developers in the space today.
I anticipate the way new scaling networks will prove themselves in the months to come will be a mix of their community and application onboarding efforts as well their ability to guarantee uptime and security of their networks. I see scaling networks as more a utility-like need, which is throughput, whereas Bitcoin and Ethereum are defensible for the long-haul due to the confidence in the security and uptime of these networks.
Conclusion
While I pointed out that buying crypto for a long-term investment might prove to be less asymmetric than accumulating in previous bear market cycles before 2020, I still confidently believe that buying now is still insanely asymmetric to the scenario that the asset class achieves majority mainstream adoption one day — to the extent that products like YouTube and Google touch every internet user today. I believe it’s possible that web3 crypto trading might touch every person on the web. As many tout, we’re still so early. In the scenario that BTC and ETH continue to be adopted globally, I see a clear path to both networks being valued at multiple trillions of USD in the coming years.
